1. The Rise of BRICs’ International Financial Power
and Its Implications* (first draft)
Xin WANG
School of Finance
University of International Business and Economics
waxi0617@yahoo.com
Abstract
In recent years, with increased financial openness and significantly raised external
investments of various kinds, plus the fact that China and Russia have become net
capital exporters and their currencies in their respective regions have become more
influential, the international financial power of BRIC countries has been
strengthened. However, the rise of BRICs’ international financial power is not
proportionate to their development in real economy and external trade, and their
foreign investments are mainly in the form of foreign exchange reserve investments.
This is a direct result of BRICs’ lagged domestic financial development.
The moderately enhanced power of BRICs is advantageous to providing low-cost
capital to international market, safeguarding international financial stability and
promoting international financial system reform. But the four countries are still in
unfavorable positions in the international division of labor, which determines that
they can hardly exert major influence on the international financial governance and
the adjustment of global imbalances.
In the future, the strengthening of BRICs' international financial powers and their
economies' sustained and stable development depend to a large extent on their
domestic financial development. Therefore, BRICs should accelerate their domestic
financial reform and endeavor to develop financial markets, further reinforce trade
and investment relations among the four countries and between BRICs and other
economies, as well as strengthen BRICs’ policy coordination with respect to
important international financial issues.
*
The views expressed here are those of the author and should not be attributed to any
organization. The author would like to thank Fan QI and Ying CUI for their excellent research
assistance and for translating the Chinese version into English.
1

2. Along with a rapid growth of real economy and foreign trade, BRIC countries'
international financial power and influence have been gradually increasing.
Whether or not these four countries can exert very important impact on the
international financial stage in the future, especially their potential role in the
international financial governance, etc., have become issues of general interest
around the world. This paper documents BRICs’ rise in international financial
power and its limits, analyzes the relationship between their international
financial power and domestic financial development, studies BRICs’ impact
on international financial system and governance, and presents concluding
remarks.
I. The moderate rise in BRICs’ international financial power
In recent years, the BRIC countries have been actively participating in the
economic and financial globalization, achieving relatively quick overall
economic and external trade development and increased international
financial power and influence. However, due to lagged domestic financial
development, BRICs’ international financial power as a whole is relatively
weak considering their positions in the world economy and foreign trade.
1. The international financial power of BRICs gradually rises
BRICs' ratios of external financial assets and liabilities to GDP have been
rising, representing their higher financial openness. External financial assets
and liabilities reflected in the International Investment Positions (IIP) are the
synthesized results of an economy's international payments in years, which
serve as better guides to this economy’s capital restrictions and cross-border
capital flows than the De Jure policies and regulations. The possible problem
of excessive fluctuation of international payments in flow data can be avoided
by using stock data. According to Table 1, in recent years the ratios of external
assets and liabilities to GDP of BRIC countries demonstrate a trendy increase.
After the outbreak of the 2007 sub-prime mortgage crisis in the United States,
due to dramatic changes of exchange rates and cross-border capital flows, the
external assets and liabilities of BRICs have undergone substantial variation.
Table 1 The BRICs’ ratios of external assets and liabilities to GDP (%)
External assets/GDP External liabilities/GDP net external assets/GDP
Russia Brazil China India Russia Brazil China India Russia Brazil China India
2004 69 22 48 25 70 67 34 33 -2 -45 14 -8
2005 68 19 55 23 72 57 36 31 -4 -38 18 -8
2006 74 22 64 28 78 57 40 35 -4 -35 24 -7
2007 84 27 71 35 96 69 36 40 -12 -42 35 -5
2008 61 25 65 29 46 42 32 34 15 -17 33 -5
Source: IMF, International Financial Statistics.
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3. The indicator of financial integration (FI, the sum of external assets and
liabilities relative to GDP) can better reflect a country's financial integration
with the outside world. However, external assets include reserve assets, and
the rise of external assets and hence the financial integration level resulted
from the accumulation of foreign exchange reserves does not necessarily
reflect a relaxation of capital restrictions or a strengthening of private external
investing capabilities. Probably to the contrary, this fact to a large extent
illustrates that many capital restrictions still exist in these economies, and that
private capital outflow channels are limited. Deducting reserve assets, the
adjusted financial integration indicator (FIA=FI*(1-reserve assets/external
assets)) will more accurately reflect degrees of a country's financial openness
and capital account liberalization (Wang 2010).
Table 2 shows that in recent years, even with frequent fluctuation, BRICs’ FI
generally rose. In 2008, right after the financial crisis, the four countries' FI all
declined as a result of contracted international financial activities. Among the
four, Russia's FI is the highest, with China and Brazil in the middle, and India
the lowest. The picture is different when the impact of foreign exchange
reserve is considered and FIA is used for a judgment: since 2004, Russia and
Brazil's FIA decreased and India's increased, while China's FIA firstly went
up and then down. In 2009, Russia's FIA is the highest, with Brazil, China and
India ranking successively (Figure 1). Russia's FIA is higher than that of South
Korea, but it is significantly lower than Japan and Germany. In comparison,
China's current FIA is lower than that of West Germany in 1980, and is
comparable to that of Japan in the mid-1980s.
Table 2 BRICs’ financial integration before and after adjustment
India Brazil China Russia Japan South Korea Germany
FI FIA FI FIA FI FIA FI FIA FI FIA FI FIA FI FIA
2004 0.58 0.08 0.90 0.58 0.82 0.27 1.39 0.97 1.37 1.09 1.03 0.41 3.05 2.99
2005 0.55 0.10 0.76 0.51 0.91 0.30 1.39 0.90 1.66 1.33 1.07 0.46 3.44 3.36
2006 0.64 0.12 0.79 0.51 1.03 0.37 1.52 0.89 1.78 1.44 1.17 0.57 3.66 3.59
2007 0.75 0.15 0.96 0.49 1.08 0.39 1.80 1.01 1.88 1.54 1.36 0.76 3.84 3.77
2008 0.63 0.17 0.68 0.36 0.98 0.33 1.06 0.62 1.61 1.32 1.19 0.70 3.72 3.65
2009 0.74 0.20 0.99 0.49 1.04 0.30 1.71 1.03 1.78 1.47 1.63 0.90
Note: FI= (external financial assets+ external financial liabilities)/GDP
FIA= FI* (1-reserve assets/external assets).
Source: IMF, International Financial Statistics.
BRICs’ External assets have been increasing, particularly reserve assets. In
recent years, with various external investments on the rise, BRICs become a
power in the international financial market that cannot be neglected. Seeing
from the perspective of outward foreign direct investments, according to
statistics of the United Nation Conference for Trade and Development
3

4. (UNCTAD 2010), the four countries' outward FDI started to grow rapidly
from a relatively low level since 2005, and reached $147 billion in 2008,
accounting for 9% of the world’s total for that year-the same ratio was less
than 1% a decade ago. Considering outward FDI stock value, Russia has the
largest stock, China and Brazil are in the middle, and India is the last one.
China's outward FDI may soon overtake Russia's, as China has a much larger
economic scale and a faster economic growth rate that provide higher FDI
growth potential. Currently, compared with FDI inflows, BRICs' outward FDI
are still small. By the end of 2009, the respective FDI stock values of BRICs
are: $157.7 billion for Brazil, $229.6 billion for China, $77.2 billion for India,
$248.9 billion for Russia (estimated), totaling $713.4 billion. By contrast, the
total direct investment liabilities of BRICs are $1290.4 billion.
The external portfolio investments (reserve investments excluded) and BRICs’
bank loans to non-residents have shown a quick increase from a relatively low
starting point, but the values are still small compared with BRICs’ economic
scale, which may derive from the fact that the four countries have maintained
certain restrictions on these two volatile capital flows. Take China for
instance, resident individuals and enterprises can invest orderly in foreign
financial markets through the Qualified Domestic Institutional Investor
(QDII) scheme, however, licenses and investment quotas for QDIIs must be
granted by government agencies. In recent years, financial institutions of the
four countries have gradually enlarged their external lending, but their
businesses are next to nothing compared with those of the world. According
to BIS statistics, by the end of June 2009, China and India both have $104
billion external bank lending outstanding, and the data for Russia and Brazil
are $147 billion and $96 billion, respectively. The sum of the four countries
outstanding external bank loans only accounts for 2.1% of the aggregate of the
world. Although China's commercial banks have extended huge domestic
loans, their external loans are very small, with policy banks mainly in charge
of this business.
Among the many kinds of external assets of BRIC countries, the fast growth
of foreign exchange reserve is the most noticeable thing. China and India's
reserve assets occupy over 70% of their respective external assets, which are
especially high, and Russia and Brazil's shares are also much higher than
developed economies (Figure 3). Across the world, BRICs’ reserves account
for more and more of the global reserves, and China has the highest number.
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5. Table 3 BRICs’ foreign exchange reserve shares in the world (%)
2005 2006 2007 2008 2009
Russia 4.22 5.78 7.15 5.81 5.38
Brazil 1.25 1.63 2.69 2.64 2.92
India 3.51 3.79 4.62 3.43 3.42
China 19.11 20.58 23.10 26.80 30.02
Total 28.09 31.79 37.56 38.68 41.74
Source: IMF, International Financial Statistics.
For an emerging economy, the rise of its foreign exchange reserve is good for
enhancing external payment abilities and preventing from cross-border
capital flow shocks. Nevertheless, whether or not reserve increase will
necessarily cause international financial power to sharply rise is debatable.
During the periods of Gold Standard, Gold Exchange Standard and Bretton
Woods System, most of the countries' currencies were linked to gold one way
or another, and gold was the last resort of payment. Through current account
surplus, a country could gain gold, which was vital to the stability of its gold
standard and financial system. After World War II, the United States owned
3/4 of the global monetary gold reserves, enabling it to seize the hegemonic
status financially in the world at that time. However, gold standard has
already been replaced by credit currency system, and a country’s foreign
exchange (FX) reserve is denominated in certain major international
currencies, which must be invested in related countries’ financial markets. In
situations where reserve currencies depreciate against the country’s domestic
currency, or the financial asset yields of the reserve currencies’ issuing
countries decrease, or prices of goods and services denominated in reserve
currencies rise, etc., this country may suffer from big losses. After reaching a
certain level, which might not be easy to define, the costs of FX reserve for a
country will become more evident. Therefore, FX reserve accumulation is a
double-edged sword and cannot necessarily translate into a proportionate rise
in its international financial power.
China and Russia have gained net creditor status. Since 2004, Chin’s net
foreign assets have become larger and larger compared with domestic GDP,
while Russia also became a net creditor in 2008. Due to impacts of
international financial crisis, Russia and Brazil’s net assets (liabilities) have
changed dramatically. Relative to other emerging economies relying heavily
on foreign capital inflows, China and Russia, as net creditors, can better avoid
risks associated with international payments. But whether or not this
indicates these two countries have become international financial powers is
worthy of further analysis. From the developed countries’ history, we can see
that along with the rise of real economic powers, the United Kingdom in the
second half of the 19th century and the United States after the beginning of
the 20th century both had net external capital outflows and then became
5

6. financial powers in the world. Japan and West Germany behaved the same
way in the 1960s and 1970s. However, over-exaggerating implications of net
external assets on emerging economies is fallacious. Take China as an
example, China is exporting net capital at a time when its income and capital
stock per capita are still quite low, which means that China’s precious
financial resources are taken advantage of by other countries instead of being
used in domestic consumption or investments, reflecting to a large extent an
undeveloped domestic financial market and weak abilities to efficiently
allocate resources (Wang 2007). In the long term, this is not favorable to
China's economic development and enhancement of her international
financial power.
Some financial institutions in BRICs have increased their international
exposure, and domestic currencies of China and Russia start to “go global”.
More and more financial institutions of BRIC countries, in pace with the rise
of their strength, begin to enlarge their foreign businesses. But they are still at
the early stage. On the whole, there are only a few financial institutions that
possess relatively high international competitiveness and run businesses
globally. In China, though many financial institutions are among the global
leaders in terms of market capitalization and they excel in fast business
expansion and a high profitability-even better than many peers in other
countries, their income sources are still concentrated on domestic market.
According to the statistics of China Banking Regulatory Commission,1 as of
the end of 2009, five large Chinese commercial banks had invested in five
foreign institutions, by acquiring or investing in shares and with a total
acquisition value of $7.13 billion. By the end of 2009, Chinese banks’ external
assets accounted for only 2.3% of their total assets. According to the statistics
of Brazilian Central Bank, the share of Brazilian banks’ external assets was
merely 2.5%.
As a result of China’s significant rise in national economic and external trade
strength, the foreign demand for renminbi has increased. China is now
conducting the pilot program of cross-border trade settlement in renminbi,
which experiences relatively high growth in business since 2010. By the end of
July 2010, banks have accumulatively handled ￥ 91.64 billion cross-border
trade settlement business in renminbi, which only accounts for a very small
share of China’s total foreign trade value. Currently, China is providing
settlement arrangement for RMB businesses conducted by banks in Hong
Kong and Macao, including RMB deposits, loans, remittances, currency
exchanges and bond issuance etc. However, by the end of August 2010, RMB
deposits in Hong Kong is only about ￥ 100 billion, accounting for
1
China Banking Regulatory Commission, Annual Report 2009.
6

7. approximately 1.8% of the total banking deposits in the territory. In the
coming years, given China’s booming economy and foreign trade, and market
expectation of RMB appreciation, RMB’s “go global” business has much room
for development, but the process should be a gradual one. RMB is not yet
fully convertible and still has a long way to go before becoming an
international currency. In Russia, after announcing the convertibility of Ruble
in the second half of 2006, the authorities actively pushed Ruble’s
internationalization, especially commodities trading in Ruble. Unfortunately,
after the deepening of the global financial crisis, amid large capital outflows
and domestic market turbulence, Ruble experienced sharp depreciation and
its internationalization process encountered headwind. India and Brazil are
even further away with respect to domestic currency internationalization.
2. BRICs’ rise in international financial power is not proportionate to their
economic and trade development
In recent years, BRIC as a whole has achieved relatively high economic and
foreign trade growth, resulting in further enhancement in their status in the
world economy. According to statistics from IMF World Economic Outlook,
based on PPP, the four countries’ GDP accounted for 13% and 16% for 2007
and 2008 respectively, and this ratio reached 23.5% in 2009, which was 7.2
percentage points higher than that of 2000. China alone takes over a half of
four countries’ GDP. After the international financial crisis, BRICs’
contribution to world economic growth is more evident. In the first half of
2010, China, India, Brazil and Russia accomplished growth rates of 11.1%,
10.6%, 8.9% and 4.2% respectively, with most of the developed countries in
sluggish.
The development of BRICs is reflected particularly in foreign trade. From
2006 to 2008, the average annual growth rates of foreign trade for BRICs are
24.3%, 21.2% and 31.3%, respectively, and are 15.5, 14.1 and 28.6 percentage
points higher than those of the world. But BRICs’ foreign trade decline after
the latest global financial crisis was also extraordinary. In 2009, the foreign
trade value of BRICs fell 21.2% year on year, 10.5 percentage points more than
the decline of the world trade value.
Compared with their economic and foreign trade development, BRICs’
international financial power has moderately increased. From 2004 to 2008,
the ratio of BRICs’ GDP to that of the United States, EU and Japan combined
had been on the upswing, increasing by 11 percentage points; the ratio of total
imports and exports of BRICs to that of the three developed countries or
regions rose by a faster pace of 16.2 percentage points; the ratios for outward
foreign direct investments, outward portfolio investments and other
investments had gone through much variation, with no ratio rising more than
2.4 percentage points in five years.
7

8. Table 4 BRICs’ economic and financial strength relative to those of developed
countries (%) *
Year GDP Imports andOutward ForeignForeign PortfolioForeign Other
Exports Direct Investment Investment Investment
2004 13.0 27.9 4.0 1.1 4.6
2005 15.1 32.2 4.8 1.3 4.9
2006 17.3 35.9 5.9 2.1 4.6
2007 20.2 39.4 7.1 2.0 5.3
2008 23.9 44.1 6.4 2.5 6.9
*Ratios of BRICs economic indicators to those of the United States, EU and Japan
combined.
Source: IMF, International Financial Statistics.
BRICs’ expansion in external investments falls behind the development of real
economy and foreign trade, to a large extent due to the four countries’ lagged
domestic financial development in general, and underdeveloped financial
markets in particular. According to Bank for International Settlements
statistics, by the end of June 2009, the domestic debt securities outstanding of
China, Brazil, India and Russia was $2307 billion, $1088 billion, $520 billion
and $36 billion respectively, a mere 6.4% of the world’s total. As of the end of
2009, the stock market capitalization of China, Brazil, India and Russia was
$3314 billion, $1339 billion, $1260 billion and $476 billion respectively, totaling
14% of the global stock market capitalization. Concerning the ratio of the sum
of equity and debt market capitalization plus bank credits to GDP, China
ranked the first in BRICs at the end of 2008 with this ratio close to 2, yet the
same ratios for the United Kingdom, Germany and Japan all exceed 3.5
(Figure 4). Due to the underdeveloped domestic financial markets and limited
capabilities of financial regulation, BRICs cannot afford to fully liberalize their
capital accounts or open their domestic financial markets. As a result, they are
not able to promote private outward investments or attract foreign capital on
a large scale, hindering the enhancement of the four countries’ international
financial power.
The gap between emerging economies such as BRICs and developed
economies in financial development may continue to exist or even get wider.
In the past two decades, against the backdrop of an increasing degree of
economic and financial globalization, certain division of labor has taken shape
between developed economies and emerging economies in terms of real
economy (foreign trade) expansion and financial development. Although the
emerging economies progress fast in foreign trade, developed countries’
domination in international finance is strengthened. In regard of the ratio of
external financial assets and liabilities to gross imports and exports, industrial
8

9. economies’ ratio has been on a relatively quick rise since the mid-1970s, while
the ratio for emerging economies and developing countries as a whole,
though increased during the period between the mid-1970s and the
mid-1980s, has changed little or even declined since then (Figure 5). In the
past decade, the above ratios of BRICs have not maintained continuous
growth, and in some years they decreased (Figure 6), indicating their lagged
international financial development relative to that of the foreign trade.
After this round of financial crisis, developed countries’ financial systems are
heavily damaged. The situation that their financial sectors over-expanded
relative to real economies may change, and the developed countries’ financial
advantages get impaired. However, the gap in financial development
between developed and emerging economies is still wide, and the resilience
and adjustment capabilities of developed economies cannot be neglected. In
light of concrete measures by developed economies to fix their financial
systems and strength financial regulation, in the short term, it is not realistic
for BRICs to rapidly fill this gap.
II. The implications of BRICs' rising international financial powers on
international finance and its governance
The rise of BRICs’ international financial strength will have some positive
impact on the international financial system and its governance. An objective
and practical evaluation should be done about this.
The large amount of capital outflows from BRICs facilitates the
development of global economies. In recent years, BRICs have been
increasing capital outflows mainly by means of foreign exchange reserve
investments, which make up the current account deficits of developed
countries such as USA and UK, and conduce to reducing the long-term
interest rate of international market and stimulating global economic growth.
According to a report by the research arm of the US Congress on China's
holding of US Treasuries bonds, which was published in July 2009, had China
hadn’t make a large-scale purchase of its government bonds, the U.S. interest
rate would increase by 0.5 percentage point. Recently, the U.S. economy has
undergone a feeble recovery, with a continuously high unemployment rate
and the possibility of "double dip" that cannot be ruled out. The growth of
Euro zone and Japan's economies is also slow. At this time, the relatively
rapid economic growth of BRICs and their enlarged external investments will
definitely exert greater influence on the stabilization and recovery of global
economies.
The capital outflows of BRICs are very helpful for the alleviation of the
credit crunch of developed economies, safeguarding the stabilization of the
9

10. international financical markets. Since the outbreak of the U.S. Sub-prime
mortgage crisis, the international financial markets have suffered dramatic
turbulence, and financial institutions in many developed countries have
gotten big hits. In order to stimulate their economies, developed countries
have adopted very loose fiscal and monetary policies one after another,
causing their government debts relative to GDP to surge dramatically. In
September 2009, when financial crisis deteriorated acutely, BRIC countries
increased their purchase of U.S. treasury bonds instead of reducing their
holdings, which had a vital and positive impact on the United States' efforts
to fight against the crisis actively and to avoid the crisis contagion. According
to the statistics released by the US Treasury Department, in October 2008, the
holdings of U.S. treasury bonds of BRICs increased by 18.4% comparing with
those in June the same year. As of the end of June 2010, the total investments
outstanding of BRICs to U.S. treasury bonds was $1,160 billion (China’s
holding was $840 billion), which accounted for 29% of U.S. treasury bonds
held by foreign investors. In the near future, the financing demand of
government and financial institutions of developed countries would be huge.
It was estimated by IMF (2010) that in the next three years the due debt of
banking institutions will amount to $5 trillion, posing great pressure on re-
financing.
Some observers consider that China is likely to undersell U.S. treasury bonds
in large number, causing dramatic turbulence in global financial market.
Professor Prasad (2010) of the Cornell University regards that China's loss
from doing that is not as big as some people think it is, hence the threats of
China's underselling U.S. treasury bonds are well convincing. However, since
the width and depth of the U.S. bond market are unrivaled, as long as China
continues to accumulate foreign exchange reserve in a fast pace, it will not
make a wholesale diversification away from U.S. treasury bonds. In my own
opinion, along with a fast increase in a country's foreign exchange reserve, it
is quite natural to adjust appropriately the currency structure and asset
structure to avoid risks. However, the higher the ratio of foreign exchange
reserve to external financial assets a country has, the larger the share of this
country's reserve in global foreign exchange reserves, and the closer the
economic ties among this country and its investments subject countries, the
smaller possibility that this country will adjust its foreign exchange reserve's
asset structure sharply in a sudden. The reason is simply that the stake is just
too high and the outcomes might be too severe. Besides, the larger the foreign
exchange reserve gets, the more difficult to adjust its investments technically.
In normal cases, official foreign investments are more rational than private
investments, and will increase, not reduce, the stability of the international
financial market. Foreign exchange reserves and sovereign wealth funds
usually concentrate on long-term investments and will not change their
10

11. investment strategies on the basis of short-term market fluctuations. This
investment pattern is sharply different from that of private investors who are
keenly after short-term profits. Research shows that during the periods of U.S.
Dollar depreciation, foreign exchange reserve usually increase their holdings
of dollar assets (Wong 2007), playing a stabilizing instead of destabilizing
role. Furthermore, official investment institutions unavoidably tend to relate
such issues to international relations and geopolitics, therefore, their
investments are helpful to the stability of international financial market. Deep
worries raised by some western countries’ commentators concerning big
negative impacts of China and Russia’s investments are unfounded and even
counterproductive.
The rise of BRICs’ international financial powers promotes the
international monetary system reform. The large amount of foreign exchange
reserve accumulation and investments leads to a closer relationship between
BRIC countries and international monetary system. This to some extent
increases the negotiating status of these countries. In April 2009, Governor
Zhou Xiaochuan of the People’s Bank of China, which is China’s central bank,
brought forward the suggestions on reforming the current international
monetary system and letting the Special Drawing Right (SDR) play a more
important role in international financial transactions (Zhou 2009), which
immediately attracted major attention of the international community.
Nevertheless, in addition to the factors mentioned above, there are some
reasons determining that it is less likely that dollar assets will be undersold on
large scale or that the international monetary system dominated by U.S. dollar
will undergone fundamental change. On the one hand, financial markets of
other countries can not rival the U.S. in their depth and width, therefore can
hardly absorb huge reserve investments. On the other hand, if a large amount
of investments diversify away from U.S.D assets into assets denominated in
other currencies, those related economies will have to face problems of fast
capital inflows and sharp currency appreciation, adversely impacting their
export expansion and economic growth. Recently, some Japanese government
officials have voiced a concern that China's large amount of Japanese bond
investments may cause the yen to appreciate. In mid-September, 2010,
Japanese government intervened in the FX market to arrest the JPY
appreciaton, a move that has not been taken since early 2004. The
effectiveness of the intervention and its implications for the Japanese attitude
to China’s investments remain to be seen. Nevertheless, it is fair to say that
even though foreign investors are not so happy about the safety and
profitability of USD assets, they don’t have much room for manuvaour and
therefore, the current international monetary system dominated by the USD
will not experience a quick adjustment.
Along with significant increase in their economic and financial powers, BRIC
11

12. countries' currencies have the potential to become internationalized,
enhancing the multi-polarization of the international monetary system.
However, since their domestic financial markets are still underdeveloped and
their economic growth is still more or less dependent on net export, BRIC
countries still cannot afford to let their currencies move freely against the
USD for the sake of economic and financial stability. On top of that, the
convertibility and the internationalization of BRICs’ currencies can hardly
advance as fast and smoothly as some expect. BRICs and some other
emerging economies will continue to accumulate FX reserves and invest in
the U.S. financial markets, strengthening the international monetary system
dominated by the United States.
The voices of BRIC countries in international financial stage have
increased, but hardly very influential. BRIC countries’ shares in international
financial organizations have long been small, and their voting rights and
voices only got promoted in recent years. After the latest capital injection of
the World Bank on April 25th 2010, China's total voting rights rose from 2.77%
to 4.42%, ranking the third in the world. China's voting rights in the
International Finance Corporation of the World Bank Group rose from 1.02%
to 2.29%, which is still a position behind the U.S., Japan, UK, France and
Germany. At present, China's quota in the IMF is only 3.72%, ranking the 6th
in the world. In 2009 Pittsburgh Summit, G20 leaders promised that before
the beginning of 2011, developed countries would transfer at least 5 percent of
IMF quotas to rapidly growing developing countries and emerging
economies in order to reflect the tremendous changes in the global economy.
As the biggest country whose quota is undervalued, China is most likely to
gain new quotas.
Table 5 BRICs’ shares of quotas and voting rights in the IMF
and the World Bank (%)
IMF IMF voting World Bank GDP shares in
quota rights voting rights 2009
（PPP）
China 3.72 3.65 4.42 12.52
Russia 2.73 2.69 2.77 3.05
India 1.91 1.88 2.91 5.06
Brazil 1.4 1.38 2.24 2.87
Sources: IMF and World Bank websites.
After the international financial crisis, the Financial Stability Board exerts very
important impact on discussions about economic and financial policies and
key issues such as financial regulatory reforms. Among emerging economies,
12

13. only BRICs have three seats respectively-the same as the G7 countries. China
and Brazil also send rotating members to this term of Board of Directors at the
Bank for International Settlement, an international financial organizaton that
is playing a leading role in the debate of monetary and financial policy issues.
However, the increased quotas and voting rights of BRICs are more symbolic
than realistic. Despite a willingness of China and other countries whose
quotas are undervalued to enhance their quotas and voices in international
organizations, the European countries whose quotas are widely believed to be
overvalued will not let this happen and the United States will strive to
maintain its quota in the IMF exceeding 15% in order to have vetoing rights
on important issues. In addition to BRICs’ insufficient quotas, the fact that
only a small number of middle and higher-ranking management staff comes
from BRICs (India might be an exception) will substantially weaken their
clout in agenda setting, policy debate and ultimately the policymaking in
international financial institutions. Although BRICs have become more visible
on the international stage and voiced their concerns more regularly about the
reform of international financial institutions, monetary system and financial
regulations, they still cannot get into the core decision-making circle. Lack of
large amount of talents and in-depth research on various important issues
also contributes to this fact. The differences among BRICs themselves in terms
of international relations, economic and financial development priorities will
make it difficult for them to speak in one voice.
In conclusion, the impact of BRICs and other emerging economies on
international financial governance heavily depends on their own economic
and financial powers. Although China, Russia and other countries have had a
relatively rapid foreign exchange reserve increase, they cannot get rid of their
reliance on developed financial markets after all. Only when their domestic
financial markets reach a certain level of development and
internationalization and become important platforms for international
investments and financing, can they truly participate in the formulation of
international financial rules and exert material impacts on international
financial governing. UK at the end of the 19th century and USA after the
beginning of the 20th century respectively became dominating financial
powers in the world due to their most developed financial markets at those
times.
It is not realistic to count on emerging economies to exert major influence
on the adjustment of global imbalances. The issue of global imbalances is
not a new one, and has long been controversial. 2In the early 1940s, when the
2
During the most parts of the first 70 years in the 20 th century, the United States maintained
current account surplus, while the United Kingdom experienced continued deficits. After 1970s,
Japan and West Germany (and Germany after unification) began their sustained surpluses, and the
current account deficits of the United States have become larger and larger.
13

14. U.K. and the USA negotiated the blueprint of the future international
monetary system, Keynes strongly proposed that in order to achieve
international payment balance, both surplus countries and deficit countries
should conduct necessary adjustments instead of keeping requiring deficit
countries to curb domestic demand. The United States, however, relying on
its powerful economic and financial strength, insisted that the adjustment
must mainly be made by current account deficit countries. When necessary,
according to the US’s plan, international organizations could even intervene
in deficit countries sovereign issues to safeguard the painful domestic
demand reduction had they are reluctant to do so (Dormael 1978). Ironically,
today the biggest deficit country is pressing very hard the surplus countries to
assume major responsibilities in the adjustment of global imbalances by
currency appreciation and so on. As a matter of fact, the current global
imbalances result from structural causes from many facets, including a
relocation of middle and lower-end manufacturing industries from developed
economies to China and other emerging economies in the context of
globalization, which causes these economies to produce and export more,
increasing their trade surpluses. Given an increasing scale of cross-border
capital flows and extremely volatile international financial markets, emerging
economies, with underdeveloped domestic financial markets and relatively
weak capacities to withstand financial risks, have to build up foreign
exchange reserve to guard against potential external shocks, which also is an
important reason for global imbalances.
The balance of payments conditions of the four BRIC countries are not the
same, which determines their different roles in global imbalance adjustment.
Both China and Russia have current account surpluses, yet India and Brazil
retain deficits (Figure 7). 3However, the foreign exchange reserves in China,
Russia and India are all increasing fast, which are then used to invest in
financial markets of developed countries like the U.S., helping greatly the
U.S.’s efforts to finance its current account deficits.
The above analysis shows that the rise of international financial power of
BRIC countries characterized by increasing foreign exchange reserves has not
led to significant impact on the current international monetary system and
international financial governance. In the course of unceasing economic and
financial opening up of the four countries, they all have relatively strong
motives to continuously accumulate foreign exchange reserve to avoid risks.
Building a more efficient international financial safety net and strengthening
3
India’s current account deficit accounts for about 2 percent of its GDP, which is mainly
offset by private capital, particularly portfolio investment inflows. Brazil will need to
invest in huge amount for the next World Cup and other important events in the next
few years. Until 2016, it is estimated that the ratio of Brazil’s current account deficit to
GDP will rise from the recent 1-2% to 4-5% (Goldfajn 2010).
14

15. regional monetary and financial cooperation will to some extent reduce the
emerging economies’ incentive to accumulate reserves. But the related
reforms could not be easy. Besides, when stuck in plight, it may not be that
easy for emerging economies to secure enough financing support
conveniently from reformed international financial organizations (Jeanne
2010). Therefore, many emerging economies will continue to save a lot,
leading to their account surpluses.
Moreover, with underdeveloped financial markets and a lack of consumer
financial products and services, many emerging economies are not able to
easily transform from an export-dependent growth model to a consumption-
driven one. Therefore, they do not like to see their currencies appreciate too
quickly, resulting in their rising foreign exchange reserve. Seen from the
perspective of the United States after the financial crisis, because of a
moderate economic rebound and high unemployment pressure, the United
States is likely to continue its stimulus package financed by government bond
issuing and foreign capital inflows. It still has the privilege to make good use
of the USD-dominated international monetary system, which means that the
global imbalances will not be eased in the near future. In fact, this problem
has recently shown traces of worsening again. It is obvious that the issue of
global imbalance is related to the international environment as a whole, and
that counting on emerging economies like China to exert major influence in
the adjustment of global imbalances is simply unrealistic.
Overall, in the short term, the rise of international financial power of BRICs
mainly characterized by increasing foreign exchange reserves is advantageous
to providing low-cost capital to international market and promoting the
international economic development and financial stability. Although these
four countries have somewhat strengthened their status and raised their
voices in the international financial stage, their influence is still rather limited.
If there are no essential changes taking place in the economic and financial
policies of both developed countries and emerging economies, the global
imbalances, instead of being alleviated, might get worse and lead to
devastating outcomes in the future.
III. Concluding remarks
In recent years, accompanying the rapid economic growth, BRICs’ financial
opening–up levels and international financial power have been rising, which
is mainly reflected in the following aspects: significant increase in various
external investments, emergence of more cross-border corporations and
financial institutions that have international influence, rising external
financial assets and liabilities, net export of capital by China and Russia, and
increasing impact of domestic currencies in their respective regions.
Comparatively, China’s international financial power is stronger, but the four
15

16. countries’ international financial strength, which is mainly reflected in their
rising official foreign exchange reserves, is not proportionate to the scale of
their real economy and their contribution to the global economy. This is
possibly because of their lagged domestic financial development, which has
led to a slow progress in BRICs’ currency convertibility and financial opening
process especially in India and China . In the international division of labor
against the background of economic globalization, BRICs are placed in
inferior positions.
BRICs’ moderately strengthening international financial power and increasing
external investments are helpful to providing low-cost capital to international
market and to safeguarding international financial stability, and have to some
extent increased their voices in international finance. However, BRICs are still
highly dependent on international financial markets. As a result, they cannot
have material impact on international financial governance, nor will they be
able to exert major influence on the adjustment of global imbalances. It is
worth noticing that overstating BRICs’ international financial powers and
their impact and implementing protectionist practices on the excuse of these
overstatements will hurt the healthy development of international finance.
Looking ahead, whether or not BRICs can exert more influence on the
international financial stage mostly depends on their healthy economic and
financial development. Historically, with a higher bar in terms of institutional
requirements, financial development in many countries can often be seen to
fall behind their economic growth. For instance, during the period from the
end of the 19th century to the early 20th century, without a central bank, the
United States had already become the largest economy in the world. At that
time, the financial markets of the U.S. were frequently in turmoil, with
relatively small stock trading volume, widespread speculation and market
manipulation, and high fluctuation in market prices. From 1870s to the World
War I, six major financial crises had broken out in the United States. Japan has
long been the second largest economy in the world, but there is still a great
gap in the level of financial development compared with the United States
and the United Kingdom. Although the Japanese government has endeavored
to promote the internationalization of the Japanese yen and the scale of
economy and external trade of the UK is well behind Japan, the
internationalization level of JPY is still lower than that of the British pound
until now. After the collapse of economic bubbles, Japan has sunk into “lost
decades”, which is a big blow to the JPY internationalization . It is even
harder for developing countries and emerging economies to catch up with or
exceed the financial powers of developed countries. The economies of Mexico,
Argentina and South Korea have all experienced high growth rate, yet they
were all greatly shocked by currency and financial crises. Nowadays, China
has already become the second largest economy and the largest export
16

17. country in the world; however, it is the only country among the trading
powers whose currency is not generally used in international transactions and
it still has a long way to go in terms of financial development and Renminbi
internationalization. In all, the current discussions concerning BRICs have
been concentrating too much on their economic growth rate and enlarged
trade volume, neglecting adverse effects that may be brought by financial
disadvantages. The research and judgment with respect to BRICs’
international financial powers have excessively focused on the enlargement of
their external investments while ignoring such weaknesses as the high ratio of
foreign exchange reserve investments.
In history, whether or not an economy with lagged financial development can
realize financial catch-up in time is key to its sustainable and stable economic
growth. At the beginning of the 20th century, together with the efforts to
further secure its status as the world economic leader, the United States has
continuously improved its financial institutions. For example, the year of 1913
witnessed two important advances in US’s financial reform. One is the
passing of the Federal Reserve Act; the other is the fierce criticism by
jurisprudents led by Mr. Brandeis (Wachtel 2003), which helped preventing
financial powers from over-concentrating. After the Great Depression, the
United States passed several influential acts successively such as Securities
Act and Securities Exchange Act. The improvement of financial institutions
has laid a solid foundation for U.S.’s long-term and stable financial
development and economic growth.
In complete contrast to the United States, the then flourishing Argentina
experienced economic stagnation and upheaval in the most part of the 20th
century, which is closely related to its slow financial development. At the late
19th century and the early 20th century, a great deal of capital and labor flew
into this country. Accompanied with the wide and prolific local land,
Argentina’s agriculture, manufacturing industry and external trade were
booming, indicating a prosperous future.4 However, Argentina’s financial
market was very much underdeveloped. It was very dependent on external
capital, which can be shown by the fact that before the World War I, half of its
domestic industries were controlled by foreigners. Argentina did not
implement the Gold Standard and issued too much money. In order to
promote export competitiveness, it frequently used currency devaluation as a
tool, therefore impairing market confidence in its currency-even internal
financing was often conducted in pound sterling. The first foreign currency-
linked domestic bond issuance in modern sense appeared in Argentina in
1872. From then until 1910, another three issuance of domestic bonds and
4
In 1913, Argentina’s manufacturing goods production per capita surpassed those of Spain and
Italy. Its land was more widely covered by railways than the case in the U.K.（Friden 2006）。In
1870, Argentina’s GDP per capita was 46.3% of that of the United States. The ratio was 49% for
both 1890 and 1913. However, in 1950, the ratio fell to 36.2% (Maddison 1995).
17

18. many issuance of foreign bonds by Argentine entities were denominated in
pound sterling（Reinhart, Rogoff 2009）。
Evidently, without timely improvement of financial institutions leading to
financial development, BRIC countries and other emerging economies may be
stuck in an unfavorable international division trap for a long time. As a result
of underdeveloped financial systems and distorted resource allocation,
current emerging “stars” may lose their shine at some point and even
experience severe currency and financial crises that may cause long-term
economic stagnation. In order to further promote their international financial
powers and sustainable and stable economic growth, the BRIC countries
should concentrate their efforts on the followings.
First of all, speed up domestic financial reform and endeavor to develop
financial markets. The key for emerging economies to exert greater influence
on the international financial stage is to promote their own economic and
financial power. The literature shows that bringing in more foreign financial
institutions and competition, together with a gradual opening of domestic
financial markets can be helpful to reducing the power of domestic interest
groups and accelerating financial reform and innovation, therefore improving
financial service standard and efficiency of resource allocation (Rajan,
Zingales 2003). In this process, the BRICs should fully consider the merits of
the latest outcomes regarding international financial regulatory reform,
strengthening financial regulation and macro-prudential management so as to
avoid systemic risk.
Secondly, further strengthen the trade and investment relations among the
four countries and between BRICs and other emerging economies. The BRICs’
economies are relatively highly complementary in many aspects. For instance,
China and Russia run current account surpluses and export capital as a result,
while India and Brazil run current account deficits and need foreign capital
inflows. Another example is that Russia and Brazil are commodity exporters,
while China and India are net importers of many kinds of commodities. By
substantially increasing cross-border bank credits and direct investments in
the sectors of energy and raw materials among the countries concerned, they
can promote mutual benefits and help realize win-win situation. Currently,
the industries and financial sector of BRICs and other emerging economies
have not built deep understanding and cooperation ties. From the strategic
point of views, the governments of these economies should strengthen
political trust and economic policy dialogues and coordination, better guide
and serve their domestic enterprises and financial institutions, and facilitate
international trade and investments. Measures that warrant serious
discussion include building cross-nation investment protection mechanism,
18

19. solving cross-border controversies and investment problems in time,
organizing multilateral investment funds to better support investments in
infrastructure, new energy, low carbon economy and domestic financial
markets of BRICs, and promoting local currency settlements of international
trade and investments in order to reduce foreign exchange risks.
Last but not least, strengthen policy coordination and push forward the
international monetary and financial system reform. Presently the BRICs have
already established regular meeting mechanism of state leaders, ministers of
finance and governors of central banks to discuss and coordinate in respect of
important issues. Ministers of finance and governors of central banks of
BRICs have made a decision to initiate a cooperative research project to study
the four countries’ development conditions, experiences, lessons and potential
fields for collaboration. These efforts are good for the deepening of
understanding among the four, and provide precious experiences to other
developing countries and emerging economies. Since the BRICs all greatly
benefit from globalization and have close relations with developed
economies, they will not become exclusive group, nor will they pose direct
and powerful challenge to the current international economic order
dominated by developed countries. In the next stage, it is necessary for the
BRICs to build closer cooperation mechanisms, welcome more developing
countries to participate in dialogues and coordination, increase voices of
emerging economies to improve international economic and financial
governance, and strengthen monitoring on developed countries’ economic
and financial policies, for the sake of a more stable and balanced development
of the world economy.
19

20. References
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colony to nation: Fiscal and monetary experience of the eighteen and nineteen
centuries, ” in Transferring Wealth& Power from the Old to the New World, edited by
Michael Bordo and Roberto Cortes-Conde, Cambridge University Press.
Dormael, Armand Van, 1978, Bretton Woods: Birth of a Monetary System, The
MacMillan Press Ltd.
Frieden, Jeffry A., 2006, Global Capitalism: Its Fall and Rise in the Twentieth
Century, W.W. Norton&Company.
Goldfajn, Iian, 2010, “Rebalancing the global economy: A view from the
BRICs,” in Rebalancing the Global Economy: A Primer for Policymaking, edited by
Stijn Claessens, Simon Evenett and Bernard Hoekman, Centre for Economic Policy
Research， http: www.voxEU.com
Hansakul, Syetarn, Steffen Dyck, and Steffen Kern, 2009, “China’s financial
markets: A future global force?” Deutsche Bank Research, March 16.
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Policy Research， http: www.voxEU.com
Lane, Philip and Gian Maria Milesi-Ferretti, 2006, “The external wealth of
nations mark II: Revised and extended estimates of foreign assets and liabilities,
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Rajan, Raghuram G., and Luigi Zingales, 2003, Saving Capitalism from the
Capitalists, Crown Business, New York.
Reinhart, Carmen, and Kenneth Rogoff, 2009, This Time is Different: Eight
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Wachtel, Howard M., 2003, Street of Dreams: Boulevard of Broken Hearts,
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21. diversification, ” Working Paper Series, WP07-6, Peterson Institute for International
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Zhou, Xiaochuan, 2009, “Reform the international monetary system,” http:
www.pbc.gov.cn
21

22. Figure 1 Adjusted financial integration (FIA) *of BRIC countries
Note: FIA=FI*(1-reserve assets/external assets), where, FI=(external assets+ external
liabilities)/GDP
Source: IMF, International Financial Statistics.
Figure 2 Outward foreign direct investments of BRICs
22

23. Figure 3 The breakdown of external financial assets of BRICs
100%
80%
60%
40%
20%
0%
Russia China India b Brazil Japan US a EU a
direct investment portfolio investment
other investment reserve asset
Notes: a. data as of the end of 2008
b. data as of the end of October 2009
Source: IMF, International Financial Statistics.
Figure 4 Scales of financial market to GDP ratios of some economies in 2008 (%)
Source: Hansakul et al (2009).
23

24. Figure 5 Relative development of international finance and foreign trade of different
economies*
* represented by the ratio of the sum of external assets and external liabilities to the total
value of foreign trade.
Source: Lane, Milesi-Ferretti (2006).
Figure 6 Relative development of international finance and foreign trade of BRICs *
*represented by the ratio of the sum of external assets and external liabilities to the total
value of foreign trade
Source: IMF, International Financial Statistics.
24

25. Figure 7 Current account balance to GDP ratioes of BRICs
Sources: IFS, IMF; Deutsche Bank.
25